Behind FTA policy calibration: More imports, lack of competitive edge

The Indian Express, February 22, 2022

Even as the government signals a renewed push on the trade front by targeting early harvest bilateral deals, India’s existing Free Trade Agreements (FTAs), most of which were inked in the mid-2000s and are under an official review process, have seen imports grow much faster than exports over the last decade.

Between FY11 and FY21, exports to nine countries and two trading blocs, with which India already has trade agreements, grew 36 per cent to top $62 billion while imports from these countries grew 44 per cent to nearly $75 billion, doubling the trade deficit to $11.8 billion in FY21 from $5.8 billion in FY11.

The gap between growth in exports and imports was even larger in FY19, the last fiscal that was not impacted by the pandemic. Between FY11 and FY19, India’s exports to these countries grew by 57 per cent to $72.4 billion while imports grew 80 per cent to $93.2 billion.

India concluded an FTA with the UAE last week and is currently in the process of negotiating deals with Australia, the UK, Canada, Israel and the EU.

The country has bilateral trade agreements with Japan, South Korea, Malaysia, Thailand, Singapore, Sri Lanka, Nepal, Bhutan and Mauritius. India also has a trade agreement with the ASEAN group of countries and is part of the South Asian Free Trade Agreement.

Among countries with which India has trade agreements, key markets where exports have grown on a net basis between FY11 and FY21 include Nepal, Malaysia, Bangladesh and Thailand while import growth has far outpaced export growth in trade with Vietnam, Singapore, Indonesia and Japan. While India’s exports to South Korea have grown slightly faster than exports between FY11 and FY21, trade deficit with South Korea in FY21 was the highest among FTA partner at $8.1 billion, followed by Indonesia at $7.4 billion and Japan at $6.5 billion.

India has already launched a review of the FTA with South Korea and is working to launch a review of the FTAs with Japan as well as the FTA with ASEAN. Commerce Minister Piyush Goyal has previously said trade agreements with ASEAN, Japan and South Korea “have not met their promise” for India as domestic goods “face barriers” in these countries, even as they provide trade partners duty free access to Indian markets.

In 2019, India backed out of the Regional Comprehensive Economic Partnership (RCEP), which would entail a trade agreement with 10 ASEAN members as well as Australia, China, Japan, New Zealand and South Korea, citing “outsanding issues and concerns” after the government faced domestic pushback about the adverse impact of the agreement on the MSME, textile, dairy and manufacturing sectors.

Experts noted that the key cause behind India not being able to benefit as much as trading partners from the lower tariff barriers offered by FTAs was a lack of competitiveness in Indian industry.

Biswajit Dhar, professor at Jawaharlal Nehru University, said the key issue holding back Indian export growth was competitiveness.

“The issue is one of competitiveness and that has been something that has always kept us behind,” said Dhar, noting that India needs to look at boosting the manufacturing sector and reducing the cost of doing business including logistics costs.

Since 2020, India is looking to conclude early harvest agreements in ongoing FTA negotiations, aiming to exclude sensitive sectors such as agriculture including dairy and sectors where Indian players may not be able to compete with foreign players. Early harvest schemes can allow countries to exclude contentious issues and agree on quick tariff concessions in mutually beneficial areas.

The upcoming early harvest scheme with Australia is likely to exclude the wheat, dairy and beef sectors which are considered sensitive sectors but is likely to liberalise trade in mining, pharmaceuticals, health, education, renewables, railways, gems and jewellery, tourism, defence and textiles.

Experts have, however, noted that early harvest agreements can, at times, reduce the incentive for further negotiation for a comprehensive FTA and may also be subject to challenges at the WTO if they are not converted into agreements that eliminate Customs duties and other trade barriers on “substantially all the trade” between the WTO member countries.

Dhar said it was important for the government to ask industry about pain points in market access in countries with which FTAs are there to boost exports. “These are the little things that have often paid dividends in other countries”, Dhar said.

Pradeep S Mehta, Secretary General of CUTS International, also highlighted competitiveness as the key issue holding back Indian exports noting the high cost of doing business in India.

“In India, power rates are one of the highest in the world and we have the anomaly of industrial power rates being higher than domestic rates,” Mehta said, adding that high logistics costs and relatively lower availability of finance had also hampered India’s exports. Mehta added that the lack of competitiveness had also made Indian industry hesitant about the FTAs currently under negotiation.

Mehta did note, however, that the government’s Rs 1.97 lakh crore production linked incentive scheme to boost manufacturing across sectors and the national logistics policy were steps in the right direction to boost competitiveness of Indian industry.

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